Simple Don continued:
Marginal productivity is at the very core of the free market theory. Among other things it is what determines the costs of goods and services in the market. According the theory supply and demand will force prices down until the price equals the marginal cost of the last item produced, the so-called market clearing price. This is what guarantees the maximum utilization of the production facilities that is the sole promise of free market theory, the efficiency that the proponents claim will guarantee the greatest measure of social justice.
There is a minor flaw in this in that the marginal cost of the last item produced doesn't allow for any profits in industrial production. Marginal product theory requires that the law of diminishing returns kicks in to overtake the economies of scale. That the marginal product costs of production is higher than the average costs of producing all of the products. But this not true of modern industrial production.
A company makes a profit if the average price exceeds that average cost. Marginal cost is incidental to profitability. Diminishing returns can play a part in marginal cost, but it doesn't have to. There is certainly no logical contradiction here at all.
You don't seem to understand what we are doing here. You are the one who claims that marginal productivity is valid. I don't believe that it is.
You are suppose to defend marginal productivity, not to make my argument that is not valid.
Because if marginal productivity is not valid, then the entire theory of the free market isn't valid. There is no way that the free market can self-regulate. If it can't self-regulate then you can't eliminate government regulation. You are pretty much stuck with the current economy as being pretty close to closest to the free market as we can get, which is true.
Let's be clear, the proponents of the so-called free market are making a extra ordinary claim, that the that the market can self-regulate if it is freed from most if not all government interventions, especially government regulations. That the mechanism of supply and demand setting prices is strong enough to take over the role of government in policing the economy, in preventing and punishing bad behavior.
The proponents of the self-regulating free market can't get away with just stating that this true, they have to come up with an explanation of how this is would work, a theory. Absolutely central to this theory of how the free market would work without the control of government and government's regulations is marginal productivity and supply and demand driving prices down to the cost of the last product made, the marginal price.
And yes, you are correct, the theory of marginal productivity doesn't have anything to do with making a profit. In fact, one of the many massive problems with marginal productivity is that in the industrialized world that we live in marginal productivity theory would not only eliminate profits, it would guarantee that sales would be at a loss. This is why marginal productivity theory is bullsh*t. This is one of many reasons why the theory of the self-regulating free market is complete bullsh*t.
So while I appreciate your helping me make my arguments it will be confusing to any third party reading this. You are suppose to be defending the theory of marginal productivity. You claimed the theory was not doubted, along with the theory of the quantity of money. So I am giving you an opportunity to defend it that statement.
Without diminishing returns there is not only no profit, there is nothing to set the price. It will continue to fall bankrupting the less efficient producers and transferring more of the business to the more efficient producers, concentrating more of the business in fewer hands. This conflicts with one of the basic requirements of the free market theory, that producers have to be so numerous and small enough that they can't individually effect the price. Eventually only a few producers would be left and they will be able to control the price and be able to evade market discipline, the only controlling mechanism in the free market theory.
Eliminating the inefficient competitors is a BENEFIT of the free market system, not a problem with it. Yes, if unrestrained by diminishing return, prices will fall until the market is saturated. The number of competitors will decline as inefficient producers are weeded out, but what free market economist insists that there must be many competitors? I'm not aware of any. You have the theory of "oligopoly," but that is totally unproven and is the work of neo-Keynesians, not the classical schools.
Bill, once again I appreciate the help but I really don't need it.
It is the theory of the self-regulating free market that requires many small competitors. If there are only a few competitors then they can better control the price that they get for their products. They would escape the discipline of the market, their prices would not be set by the mechanism of supply and demand. The self-regulating free market wouldn't be possible, which is the whole point, it isn't.
The claim that you made that an oligopoly can't exist, that it is totally unproven is breathtakingly wrong. I suggest that you look up the word and to think about it. The entry in Wikipedia has many examples of real world oligopolies. It is not a just a theory, it is a fact.
It is pretty much the entire basis of the success of the mixed market capitalism that we have right now, that we enjoy the benefits of having just a few highly efficient producers but we have to regulate their behavior. One of the many benefits we would lose if we could somehow change our current economy into the model of the free market.
And predictably you are wrong about the classical economists, David Ricardo, Adam Smith, John Stuart Mill, Thomas Malthus, Jean-Baptiste Say, etc. They were looking at an economy that was coming out of mercantilism, an economy made up almost entirely of real world oligopolies and monopolies. Adam Smith in his
The Wealth of Nations mentioned the invisible hand one time only, 90% of the book was warnings about what he called "rent" that could be imposed on the economy by oligopolies among other "rentiers" that could manipulate the market unless they were regulated and controlled
Oh, and of course Marx is considered a classical economist. He went even further than those mentioned above. Much, much too far. But many of his observations about the problems with capitalism were valid. He was one of the first economists to see the problem of debt deflation for example.
The quantity theory of money failed dramatically as a target for controlling the economy, reference Volcher and 20% interest rates. Google the following quote. “The use of quantity of money as a target has not been a success. I’m not sure I would as of today push it as hard as I once did."
First of all, the quantity theory of money and the "use of quantity of money as a target" are not the same thing
Once again, an astounding statement to make. The quantity theory of money states that excess exogenous money production is the cause of inflation. For this to be true would mean that the way to prevent inflation is to reduce the production of money. If the production of money is only a result of inflation and not the cause of it then trying to directly reduce the quantity of money in circulation would be doomed to failure. Which it was.
Secondly, I fail to see how the regime of Paul Volcker refutes the quantity theory of money in any way. Volcker raised interest rates to 21% in order to reduce money creation and money velocity because inflation was at 18%. In other words, he set real interest rates at 3%. It worked remarkably well. Within a few years, inflation was in the 4% range and the economy was booming. Inflation and unemployment had both declined dramatically. It's the type of thing that Bernanke needed to do when he took office. Instead, he has given us his funny-money policies which will lead to far worse problems down the road.
Volcher drove interest rates so high so fast not because he was targeting real interest rates but because he was trying to reduce the amount of money in circulation. The absolute best that could be said for him would be that he blundered into doing the right thing for the wrong reasons. He was a monetarist, he believed in the quantity theory of money. He believed that reducing the amount of money in circulation would bring down inflation. He was wrong. It is treating the symptom, not the cause.
The high interest rates produced the worse recession since the Great Depression. It started the destruction of the US's manufacturing and triggered a lot of the problems with the third world's debt. It was a stupid, stupid way to control inflation. It targets a part of the economy, construction, capital investment, automobile production, appliance manufacturing, and crushes them. The best way to reduce inflation in most instances is by increasing taxes to reduce overall demand.
However, in the 1980 period we were facing both inflation and a recession, stagflation. Which was caused primarily by the sudden jump in energy prices, the OPEC oligopoly. Which I know now that you believe whose existence is unproven. Believe me, it did exist, it still does exist.
The oil price increases produced the inflation, but a big portion of the increase in prices left the country, it went to the OPEC countries. I think that it was about 40% of it. The money that left our economy largely produced the unemployment.
Note that there is nothing in that discussion about interest rates or the quantity of money increasing.
I can probably do another 3000 or so words on stagflation and what they should have done. Suffice it to say that the inflation wasn't caused by too much money, too much money is a symptom, not a cause. And it was not caused by low interest rates. Raising interest rates and causing a massive recession is about the same as treating a heart attack by amputating both legs. If the patient survives the heart will improve because it doesn't have to work to pump blood to the legs any more. But it is a stupid way to do it. It is better to treat the real problem.
As for Weimar Republic/Zambia/hyperinflation/Oh Nooose! we have covered this many times before. There are two explanations of the causes of the hyperinflation. One is the quantity theory of money, that the governments' printed excessive amounts of money to cover their massive deficit spending. This caused hyperinflation which resulted in destruction of the currency and its eventual abandonment. Since this happened twice in the twentieth century in two of the 200+ countries of the world it is proof positive that no government can be trusted ever again with the control of the money supply.
The other explanation, the balance of payments theory, is that the while the nations involved certainly ran large budget deficits it wasn't excessive money printing that caused the hyperinflation. Certainly in the case of Germany the high deficits weren't due to profligate government spending but to a sudden drop in tax revenue. People stopped paying their taxes so that they could buy food.
That the inflation was caused by other factors, both countries were recovering from a recent war and both countries owed huge foreign debts in gold or another country's currency. That these started the inflation and it spiraled out of control when wages had to be raised to keep people fed and alive. Which has to be considered one of the most basic functions of the economy.
I'm not making much sense of this. Of course I understand the quantity theory of money but the balance of payments claim is pretty obscure. What two countries are you referring to? Weimar Germany and Zambia? What war was Zambia recovering from?
It is not a surprise that you don't make any sense of this. You wouldn't believe in the quantity theory of money if you did.
I am not as familiar with Zambia as I am with the Weimar Republic. I refuse to look it up because it is not important. But I seem to remember that it was the war in the Congo, Zambia was supporting one side and it produced the foreign debt that started their problems.
Anyway it is a minor point and in neither case does it is it the main cause. Germany came out of the first world war with its production capacity relatively untouched. It was the reparations for the war that caused the Germans problems and the fact that the Imperial government paid for the war by monetizing the debt. By not raising taxes demand increased during the war causing the start of the inflation. Zambia's biggest problem was that the massive land reform that they undertook put productive farm land into the hands of people who didn't know how to farm very well, effectively taking most of the farm land in the country out of production. They then had to buy food from other countries, increasing their debt which was in other countries' currency, mainly SA rand and US dollars.
The pertinent point is that in neither case was the inflation caused by printing excessive amounts of money, the inflation was caused by demand exceeding supply. It was caused by both having excessive foreign debts which required the excessive conversion of their currency into gold or a foreign currency.
So prices went up due to a balance of payments problem and this spiraled out of control when wages had to be raised to compensate. Where did the money come from for these increased wages?
Money for increased wages usually comes from profits. Once again, this wage inflation was part of not caused by excessive money printing. It is a real inflationary cause. Follow me to the next explanation that I made. Hopefully it will help. Hopefully
It is surprisingly easy to decide which one is correct. The quantity of money theory requires that money creation is exogenous, that is separate from the economy. It requires a direct proportionality between the money supply and inflation. It requires an economy that is at equilibrium, full employment and at a high capacity utilization, that is relatively closed to trade and has a stable velocity of money circulation. The path of causality would be first the creation of massive amounts of money, then price inflation follows and finally the currency is devalued against foreign currencies.
I don't see why any of these things must necessarily follow from the quantity theory of money as a cause of inflation.
Because these are the conditions that the economy has to be for the quantity of money to determine inflation or deflation. Once again, the quantity theory of money is a load of crap.
And it is you that is saying that it is not. And in spite of this it is me that has to explain to you the theory that you are defending.
The money creation mechanism obviously has to be exogenous for excess money creation to produce inflation. If the government doesn't produce the money, if most of the money in the economy is created by the economy, spoiler alert, it is, then the excessive money creation is a result of the inflation, not a cause of it. Equally obviously if the economy is not full employment and high capacity utilization, the neoclassical economy in equilibrium, then the excessive spending will increase employment and utilization before they could cause inflation. And proportionally I can only show by using formulas. I will try to do a short version.
The classical formulation for the quantity theory of money is
MV = PT
Where:
M is the money supply
V is the velocity of money
P is the average pricing level
T is the volume of transactions
including intermediate products and
financial transactions
This is Irving Fischer's equation of the quantity theory of money. There are two more that you don't get in the short version. The differences are really just economists arguing about details anyway.
The quantity of money theory causing inflation resolves this to
P = MV/T
In order for the money supply to cause inflation V and T have to be pretty constant. An increase in V or a decrease in T will cause inflation on their own. Also if V and T are constant only a change in the money supply would cause inflation and an we would see proportionally between the two, an increase in the money supply of X% would always create an inflation increase of Y%.
Look, I am not saving that the Germans didn't behave badly, they did run high budget deficits, they did monetize the deficits by printing money.
What I am saying is that these things contributed to the problems they weren't the main reasons for the hyperinflation. The deficits were actually shrinking before the hyperinflation hit. I am not even saying that it wouldn't be possible in the right conditions of full employment, etc. for the government spending the economy into inflation. What I am saying is that this is not the reason that these two economies went into hyperinflation.
If the excessive money printing caused the hyperinflation as you claim the progression would be,
- Excessive money printing.
- High inflation
- Devaluing of the currency against other currencies and gold.
If on the other hand the inflation was caused not by the government printing excessive amounts of currency but because the country had to buy excessive amounts of gold, Germany, and excessive amounts of foreign currency, Zambia, then the progression will go,
- Devaluing of the currency against other currencies and gold.
- High inflation because of the devaluation.
- Excessive money creation because of the inflation.
It is easy to check this, which progression is correct. In Germany the value of the mark dropped dramatically a full six months before the inflation switched to hyperinflation.
The balance of payments explanation requires a money supply that is largely endogenous, that is that money creation is integral to the economy. There is no requirement for direct proportionality between the money supply and inflation. And it doesn't require the conditions of the economy being at equilibrium, it depends on an economy opened to trade and doesn't require a stable velocity of money, which no modern capitalistic economy has. The path of causality is the devaluing of the currency, the creation of inflation from the currency devaluation triggering wage inflation and the inflation causing the explosion of the money supply
Wow! That's really a convoluted way to put it. My first question is, "What caused the devaluation?"
The devaluation was caused by the governments having to purchase gold and foreign currency to pay their foreign debts.
Clearly the currency was cheapened relative to other currencies.
That is what devaluation means.
So money creation was needed to cause the devaluation in the first place.
No, the need to settle the foreign debt caused the devaluation of the currency.
Wait, so now you agree that it wasn't the money printed to support the budget deficit that created the inflation? That it was the money created to buy the gold or foreign currency that caused the inflation and the hyperinflation. You should have told me this much sooner. The original proposition that I though that you were defending was that the money created by the budget deficit had created the inflation and the hyperinflation. Now we are getting somewhere.
No it wasn't the money created to service the foreign debt that was the problem. The money used to buy the foreign currency or gold obviously goes out of the country where it can't cause inflation inside the country. Besides the amount of money involved isn't that much compared to over all economies.
At least before the devaluation. But it is a large amount of money compared to the holdings of foreigners who own the gold and currency that are needed. What it does do is to force down the value of the currency against other currencies. This is what caused the inflation inside the countries, the increase in the prices of imports. Both countries had high levels of imports.
Devaluation will cause price inflation but it won't cause wage inflation. Wage inflation would only be "triggered" by money creation as response to the devaluation. And how on earth does wage inflation cause "an explosion of the money supply?" What economic laws or principles are you relying upon to make such an off-the-wall claim like that?
The wage inflation occurred because people have to eat. A demonstrable fact.
Since they have to eat and food costs more because of the inflation wages have to be increased.
Wage and price inflation spiral out of control. First prices or wages increase. Then wages or prices have increase in response. If you don't understand something like the wage and price inflation spiral just copy the words into Google and hit the search button. Let's try it. Google came up with 591,000 references on the web of my off the wall claim.Here is Investopedia's definition, the first one in my search results.
A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. The wage-price sprial suggests that rising wages increase disposable income, thus raising the demand for goods and causing prices to rise. Rising prices cause demand for higher wages, which leads to higher production costs and further upward pressure on prices.
Just for reference this kind of inflation is called "cost push inflation." The kind of inflation that you champion caused by evil men at the Fed producing too much cash is called "demand pull inflation."
Read the difference between exogenous and endogenous money creation. The vast majority of money creation in the economy is endogenous, it is created by the economy itself. The explosion of the money supply is caused by the inflation, not the other way around
I have provided you with many different detailed explanations of my positions and my understanding of the theories that you are defending. All that I can see that you have gone is to read through my discussion and to put in one or sentences, few of which have any meaning or add much to the discussion. Meanwhile I am forced to explain to you the very theories that you claim to understand. But obviously you don't. How many times do I have to explain these theories to you, theories that you claim to understand and that form so much of the support for your political positions.
Quick questions,
If there is no reason for the central bank like the Fed to create money, money that will only create inflation why would they do it?
Do you believe that the Fed intentionally creates inflation?
The people who run the Fed are bankers and bankers are creditors and creditors lose to inflation and debtors win, why would bankers intentionally increase inflation?
The Fed made trillions of dollars out thin air in 2008 and 2009 and monetarist economists have predicted hyperinflation every since. If increasing money supply mechanically increases inflation why aren't we awash in inflation now?
How many times, how many years do they get to be wrong before we can finally ignore them?